Since 2006, the Section 179D Energy-Efficient Tax Deduction has provided taxpayers with an incentive to increase the energy efficiency of their commercial buildings. Upgrades to the energy efficiency building deduction in 2022 boosted its value and expanded the eligibility of energy efficient retrofits of older buildings.
Many real estate developers, commercial building owners, multifamily residential building owners, nonprofit organizations and building designers can take advantage of this deduction for the 2024 tax year. It is not too late to apply for the energy efficient tax deduction for this past tax year.
§179D Deduction for Developers and Commercial Building Owners
For those who qualify, this tax deduction can be worth as much as $5.65 per square foot. For a roughly average-sized warehouse of 17,000 square feet, that deduction is worth six figures.
For the average-sized hospital with roughly 400,000 square feet, the deduction can be worth millions.
Owners of multifamily buildings that are at least four stories tall may also qualify, as may non-profit building owners. Further, tax-exempt organizations may allocate the deduction to the architects or engineers who design the property, potentially reducing the cost of the development of new projects dramatically.
However, the provisions of the deduction are more complex than ever; most building owners require professional expertise to determine their eligibility.
Eligibility for the Energy Efficient Building Deduction
Two variables guide eligibility for the Energy Efficient Building tax deduction. First, energy efficient upgrades must be made to any of the following:
- The building envelope (i.e., the building’s perimeter: windows, doors and roofing;
- Interior lighting systems;
- HVAC and hot water systems.
Second, energy efficiency must meet standards established by either the ASHRAE (American Society of Heating, Refrigerating, and Air Conditioning Engineers) for new buildings or the building’s own history for renovations.
How Much is the §179D Deduction Worth?
There are two parts to the deduction, each of which acts separately.
For 2025, the base deduction increases to $0.58 per square foot for power cost reductions of 25% and increases $0.02 per square foot for each percentage point over 25% up to $1.16 per square foot at 50%.
For businesses that meet prevailing wage and apprenticeship requirements, the deduction starts at $2.90 per square foot, increasing $0.12 per square foot for every percentage point over 25% up to $5.65 per square foot.
The rules for prevailing wages are complex. To meet the prevailing wage standards for the 179D deduction, employees and contractors must be paid at or above the U.S. Department of Labor’s prevailing wage for the job types in the given local area.
The updated deduction encourages periodic updates to the original re-design by eliminating the cap on deductions over the life of the building. Any given year’s deduction is reduced by the amount of the deduction taken in the three previous years. Because the deduction resets, property owners are incentivized to undertake new green building upgrades every fourth year.
Who Can Help Me Qualify for the Section 179D Deduction?
Few employers can make sense of the Byzantine rules and guidelines. Error in compliance can invite a painful IRS audit. Most companies planning to apply for the 179D tax deduction partner with experts wit experience in claiming the deduction and avoiding, or withstanding, an audit.
It’s not too late to consider the green building deduction for Tax Year 2024, if you move fast. National Tax Group’s engineering studies have a 100% track record of holding up under IRS scrutiny. Contact NTG today for a free, no-obligation discussion about how 179D can benefit your company.
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